Forward looking but not a dream budget for SMEs

Taslima Khan
July 10, 2014

Small and Medium Enterprises (SMEs) and startups have got a shot in the arm from this Budget. Finance Minister Arun Jaitley has announced a host of measures to give a fillip to entrepreneurship in the country.

One of the proposals that makes sense is the government proposing to set up a committee to examine the flow of funds to SMEs. The proposed committee will have representatives from Reserve Bank of India, Finance Ministry and the Ministry of Small and Medium Enterprises.

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This was very much needed. Although it is common knowledge that SMEs in India face severe challenges in terms of access to capital at different stages of running an enterprise and also grapple with high interest rates, government records on the problem are dismal. A centrally monitored committee will actually help establish the problems in terms of numbers and will be an eye opener for the government on the magnitude of the problem.

The proposal to set up a Rs 10, 000 crore fund to make risk capital investments in startups and SMEs is also welcome but startups have raised apprehensions about the government's ability to manage equity investments in startups. Earlier funds like these, including the Rs 5,000 crore India Opportunities Fund that was announced in Union Budget 2012/13 have not taken off because of lack of competence in evaluating startup proposals among other things. The Rs 5000 crore fund is managed by Small Industries Development Bank of India.

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"The venture capital (VC) fund needs to hire renowned fund managers from private VC firms to attract and invest in smart entrepreneurs. This will ensure that this fund is approachable, sector agnostic and not perceived as one more government scheme," Says Mohit Gundecha, CEO of Talent Analytics company Jombay. Similar doubts have been raised about the success of the Rs 100 crore Technology Development Fund in supporting technology startups.

The government's proposal to set up a nationwide incubation and acceleration infrastructure could be a boost because most of the existing incubators are located in startup hubs - Delhi, Mumbai, Bangalore and Pune, mostly as part of top colleges. However some startups say a better idea could have been to support the existing network of accelerators and incubators , especially those that are doing well and prompt them to expand.

Some quarters have been disappointed. "I would have loved to see better tax benefits and easing of M&A regulations for startups," says Shashank N.D., CEO of Bangalore-based company Practo.com. While the government should have announced more measures to make it easier to start and register as well as simplifying taxation, the announcement of entrepreneur-friendly legal bankruptcy framework will help in making exits easier for entrepreneurs.

The country's largest angel investor group Indian Angel Network (IAN) is disappointed with the controversial Angel Tax not being dealt with. Angel Tax has made it difficult for high net worth individuals and successful entrepreneurs in investing in startups before venture funds. "We now have a piquant situation where startups in India can raise money from foreigners (who are exempt from Sec 56) but have to relocate overseas to raise money from Indians," says Saurabh Srivastava, Co-founder at IAN.

Budget 2014-15 is also a boost for handloom and textiles sectors which are among the biggest employers after agriculture and have a large concentration of micro and small enterprises. Arun Jaitey's announcement of Rs 50 crore for Pashmina Promotion Programme to uplift the Pashmina shawls industry of Kashmir and Rs 50 crore towards setting up of a Trade Facilitation Centre to promote the handlooms industry of Varanasi is a welcome measure.

As a general boost to the textile sector across the country, Budget 2014 has proposed setting up six mega textile clusters at Varanasi, Bareilly, Lucknow, Surat, Kutch, Bhagalpur, Mysore and Tamil Nadu with a total sum allocation of Rs. 200 crore.

Overall, not a dream budget for SMEs and startups but definitely forward looking.